tv [untitled] CSPAN June 26, 2009 6:00am-6:30am EDT
that does not constitute a threat. that is informing them of what the power is, isn't it? >> as long as the reason@@@@@@@ the manager took actions that prejudiced his own company. >> this is not a threat, this is telling the truth. i do not know if anyone told them this. as a witness -- i interviewed them individually. he seemed rather happy with the acquisition that he made, accounting for 75% of the profits. i would suspect this in six months for one year from now. they would be acquiring this at merrill lynch. i do not know why we are
spending our time to find out what happened between the 15th of september and january 1. . lot went over the dam and particularly in that spectacular two week period after september 15. i want you one, before you leave here, to tell this committee and the american people what kind of jeopardy the american system and the world system was in so we reiterate that moment that we weren't all a bunch of relaxed, confident people walking around confident people walking around making clear were making an emergency judgments, working 20 and 24 hours a day and not with the clearest hits in the world. is that correct? >> thank you are for that opportunity. september was an incredibly intense period a financial crisis. many of the largest firms came under severe pressure. the failing failure were important reasons why the world economy went into a nosedive
that lasted for the entire second half or fourth quarter of 2008 in the first quarter of 2009. how the treasury, federal reserve and other agencies worked overtime to try to prevent additional failures, additional crisis. fortunately the congress provided the t.a.r.p. funding and in early october. ended october there was an incipient local banking crisis that involved responses by policymakers around the world, the u.k., australia, japan germany and elsewhere. >> anna was able to join in that effort because of the t.a.r.p. money. we averted a global financial meltdown which in my opinion very likely would it created a depression like environment in the united states far more severe than the recession we have seen recently. >> thank you mr. chairman and i gave you your shot and now i'm going to come back you. the thing we have to decide is what we are going to do in the future and how we are going to handle it in one of the things in the last several months i
have been involved with and investigations in everything from the madoff case to other transactions in the market, but studying the inside of our regulatory authorities i find that although they may have the authority, they may have the money to act, they sometimes don't know how to act or don't act properly and as a result they have all the authority in the world to prevent something from happening but it happens anyway. i want to say that charged with lie against the federal reserve and that is where we are hung up in the course of the dilemma. the federal reserve as i can see it, had several opportunities to prevent this economic crisis. one is the long used 14 years of power to lay down the conditions on mortgage obligations in this country, that all the way through about 12 of those 14 years the federal reserve failed to take any action until you came on the scene and finally did have inactive set of standards across the board.
if they had enacted earlier standards, most of these toxic assets we talk about would not be circulating around the world that their supported and passed by the united states government. two, there are issues with the federal reserve that they are now requiring additional powers, when they failed to use their-- could you address those two issues? >> certainly and i agree with you. >> the gentleman's time is expired but please answer the question. >> congressman kanjorski you are right, the federal reserve was late to invoke those protection powers. we have been very impressive as you know for the past couple of years. i think it's very important that the fed retains those powers that we strengthen the priority that those seven are decision-making and that we have strengthen accountability to report for coley to congress about what we are doing in these areas so that is very important. in terms of additional powers, it is worthwhile pointing out
that if you look at the treasury's proposal to make the fed the consolidated supervisor of systemic firms that is not a major difference in terms of power from what we currently have, which is being the supervisor of the financial holding companies. rather it would be not so much a change in power as in a change in approach where what-- whereby we would take a system wide approach and how we would regulate this firms rather than looking at them bank by bank or from my from so it is not a massive increase in power. it is a change in our strategy. >> i thank the gentleman for his response in the chair recognizes mr. turner. >> thank you mr. chairman. >> mr. bernanke want to thank you for being here today. i know that we have had a very difficult time answered with you and mr. paulson and others, we know of work diligently to try to restore the financial security of the country.
there are divergent opinions of the actions that are taken into how we should approach them. i have voted against every bailout that has come before this congress. and, i have done that because i felt that the programs that were put before us were not clearly defined. the scope of the cost or the expense was not clearly defined. the ability to hold people accountable was difficult to ascertain in programs that were undefined and i think that we are seeing now is the american public looks at this a lot of unintended consequences. there things that are happening that the american people are thinking, that is not what i thought it was going to be. i know you were facing a lot of questions today and they go right to the hard to think of questions concerning the federal government's proper role in private enterprise, how do we step in appropriately, how do we not step in? the federal government has very
mixed performance when it comes to the issues of interfering or intervention in private enterprise. he this committee has hearings on issues as basic as our contracting processes with private enterprise. we are not a very good customer. many times issues arise for people wonder whether there is an abuse of processes, conflicts of interest, so when you then put another layer of us not being a customer but as being an investor, an entity that is providing e bailout or a been an owner, the people of a great deal of concern. yesterday, i introduced house joint resolution 57, the preserving capitalism in america the amendment. it is a proposed amendment to the united states constitution because it came about as a result of my discussion with people back, because several people that i spoke to said they did not believe enough people were taking a stand to say, this is wrong. i don't believe this should happen in this manner and i know we have difficulty but i don't
agree with the structure. i don't agree that we should own general motors. the constitutional amendment would limit the ability of the government to acquire an ownership interest in a private corporation for good this give the government the ability to issue loans and allows us to invest in public authorities, public use corporations and allows investments by pension funds. it turns out that as i was discussing this with people in my community that limiting government ownership over private enterprise is not a new idea found at least eight state constitutions that in some form limited the state's ability to acquire stock or equity in a company, apparently as a result of the panic of 1837 which you would know a whole lot more about than i do as a result of your historical expertise but a number of people as the obama administration was ford as the bailouts in the financial sector move forward and as our domestic automobile industry becomes publicly owned, the
constitutional amendment that i draw the-- dropped yesterday was dropped with 100 to our original cosponsors, nearly a quarter of the house step forward and said i want to support a constitutional moment because the don't think it can be done by statute, that could say we understand that there are times when action needs to be taken for the wind to stand when intervention needs to occur but we do not believe that ownership is a structure that should be an available option. we are very concerned about what happens next. for example, we have a huge ownership interest in general motors. let's say both of them bid on government contracts. what happens then? kingford be sure that they are going to have equal treatment in the government is virtually bidding for its own contract? i would like your thoughts on the amendment and if that amendment was in place, i would like your thoughts as to how you would have gone about it and how
t.a.r.p. funds would have been used in some of these other things could have been structured in a way we would not have ended up with ownership but he wouldn't respond to our financial crisis? >> i agree with you that limited government intervention in the private sector is frequently a good policy and in that respect i think that is a very good approach. i should say though that in order to make that a policy in our financi sector will need to have a set of rules and regulations that can allow financial firms to fail and i believe in failure. phil year, capitalist and without failure is like religion without sin. you need to have filly by collective failure in a way that is not going to bring down the entire system so if you are going to do that you need to also have rules and regulations that allow a orderly failure of large financial firms. >> before, mr. chairman if he
would allow me. i don't believe you are saying argue that you think the only way you could have intervened is to result in ownership, that there were instructors of loans and other assistance that could have been provided that wouldn't have ended up and the federal government having an ownership interest and then therefore, when we get this conflict of how was the government going to execute its ownership interest? >> i would have to think about that but if you think about banking crises in history, frequently do have a period of capital being injected by the government which essentially is a temporary ownership. usually does things are only temporary but again, i'm not sure what the alternative would be. i would be happy to think about it but in order to avoid ever having government ownership again the need to figure out a way to avoid having the crisis in the first place and i think that should be the first priority. >> i am very concerned about this and this looks like a line that-- thank you so much.
>> thank you very much. i yield to the gentleman from massachusetts, mr. lynch. >> thank you mr. chairman. as someone who voted against the tire, i just want to comment on your kind remarks in saying that through the wisdom of congress we passed the t.a.r.p. built. number one, as you may remember, t.a.r.p. was presented to us as a way to purchase toxic mortgages. it was never used for that so what we voted for was never put into action. number two, several weeks after we did the tarred bill we also passed a tar corrections bill, a 400 page bill that the past to correct all the mistakes that the made in tarred so i'm not so sure that the wisdom of congress is necessarily accurately ascribe in that statement. i do want to say, i agree with chairman kanjorski about the
context in which you took all of this action. the sky was falling, it was a very difficult time. but i do want to say the reason we are going over this chronology is because we have granted the fed enormous independence and there is sometimes the tension between the premise the of the taxpayers' interest and the power of the fed and the independence of the fed and that is why we are going over this. there has been a lot of back-and-forth today but basically what the facts are is that merrill got into trouble very early in 2007 when stanley o'neal was there. it was a very difficult situation. there is a merger proposal that is supported quite strongly between bank of america and merrill lynch. there was an agreement to enter into that merger, and then at some subsequent time, there were major losses. there were early losses,
$8.4 billion that occurred in 07. it looked like an additional 12 billion was discovered by mr. lewis. .. there is an interesting e-mail from you. i'm interested in the taxpayer's position. it says -- this is from you, mr. chairman, to scott alvarez. "i had a good conversation with louis. he confirms his willingness to drop their opposition to the deal going forward and to work with the government to develop
whatever support package might be needed for a january 20. we discussed the common equity issue. we agreed that having a significant amount of top capital in the form of common equity was not an ideal solution, given the ownership duplications, but we agreed both to about possible solutions, a government backstop of capital raised, with limited control rights." it sounds to me like ken lewis is concerned about his job. for the american taxpayer to get the voting rights in return for their top moarp money, mr. lewis would be gone. is that the concern mr. lewis expressed about the tarp being presented with voting rights to taxpayers in that deal? >> i don't know what his concern
was. it may have been concerned about government intervention in the management and operations of the company. >> this discussion. it is what it is. it indicates that mr. lewis was concerned about the taxpayer having some control here. it sounds like -- it's as youboty we agree to think about possible solutions for that, a backstop of capital raised or taxpayer involvement you with limited control rights." i am wondering whether in this deal, to provide this support, whether the taxpayer is getting the full leverage they should have gotten, given the amount of assistance we put into this company, into this deal. >> the company is subject to the restrictions of the tarp and treasury provisions on executive compensation, and
subject to the supervisory oversight of the federal reserve and bocc. we've taken action to ask them to add independent directors to their board and make appropriate changes to their company. appropriate changes to the company. >> could we have not gotten greater protection for the american tax payer than what we did in terms of considering we are saving this company with the american tax payers assistance, and we don't gain the control that i think is commensurate with that support. >> well, i'm not quite sure. i would have to look at the e-mail again. at that time the t.a.r.p. money was provided in form of preferred stock, which is on the one hand mont voting but on the other hand is senior to common equity and therefore is safer. >> i & that, but it's the lack of -- it seems like mr. lewis
was most concerned with lack of input or control on the part of the tax payer and i think that would have helped, you know, in this deal if we had greater control on behalf of the american taxpayer. -- chairman thank you. i yield back. >> i now yield five minutes to the gentleman of massachusetts mr. tierney. >> thank you mr. chairman. mr. bernanke, another we the public money seemed to flow to these financial institutions. back in march of 2009, aig disclosed the name of the counterparties. the people that had credit stifel swap agreements and bank of america was among them as others. it appears from the records that there were losses in the so-called super senior multi sector credit default swaps portfolio aig had and that it
created a liquidity problem and had obligations there were problems in the portfolio to push more cash or collateral security for the obligation. the federal reserve board of new york had $85 billion loan to a ing. the testimony today is that money was used to buy all the contracts and cancel them, that's how they took care of that obligation. what was of concern to me and others is the counterparties appeared to have received 100% of that even though testimony from people at aig before the committee said they thought there were a lot of contentious reasons to think they did not all 100% if they would anything at all on those partilar obligations that there had been serious negotiations about whether they should pay anything to the counter parties and if they should pay something, chest and 100% they should pay. we pressed mr. lardy at aig for makarov on just how the negotiations went, why did they pay 100%, his comment was he was
the wrong person to talk to and in fact the fed had all of those documents and paperwork because they had struck the deal. so, my question to you is why was 100% paid on these obligations including what was the rationale, why weren't the interest of the public money interests protected so that there was a bitter negotiation than just forking over 100%. >> i don't see what basis does than 100% could be paid. there were obligations, failure to pay would allow the creditors to force bankruptcy which is exactly what we were trying to avoid. this is precisely why we need a regime that would allow the reza olver to hair cut creditors and abrogate existing contracts but under the current lull you can't avoid bankruptcy without paying off existing contracts. >> the people that were running aig said they thought they were certainly issues involved and they didn't owe the money under the contract that the default may not have occurred or if it
did it didn't obligate them to pay full amount. these people that have made the contracts will strongly negotiating on the time and apparently they felt they could have struck deals that wouldn't have obligated 100%, these are contractual issues so they could have been done and once they turned the matter over to the fed their inference is rolled over and gave 100% to the bank of america, citibank and other people and it looks to others from the outside trying to make those people healthy unquestionably by taking public money and putting folding on the deal so my question is will you produce to this committee copies of the credit derivative contracts and the aig corporation with those third party counterparties including the details of the terms and conditions of the contracts all documents and correspondence regarding the special purpose vehicle that was created by the fed to do these transactions including the negotiations that
went on for that and then correspondence concerning the trusts we can get a look at the documents and make an assessment on that. >> i think we've just in the recent release released a whole set of documents related to those issues but if you have the specific -- we created a monthly publication that provides information about the maiden lane for example. if you would send a letter with requests we will see what's available. >> we certainly will. we want everything that's available and the question to you is when we make that request will you provide it? >> if i am able to do so, i will. >> thank you. i yelled back. >> and i yield to the gentleman from illinois, mr. davis. >> thank you very much, mr. chairman and chairman bernanke, and thank you for being here and for your long
patience and endurance. let me just ask you how involved is the fed in the day-to-day management of bank of america? for example, does the fed have veto power on major decision making at bank of america and has any consideration been given to replace an upper level management? >> the fed isn't involved in the day-to-day management. that's the responsibility of the board and management. we are involved in evaluating the capitol, the assets, liquidity and management of the corporation. we have had concerns about aspects of the management and we have asked the board in particular to add independent directors which they are in the process of doing and will continue to be careful and monitor the management situation but we do not take daily decisions. that is not our job. >> mr. chairman, let me ask you when the government invested
heavily in aig, fannie mae and freddie mac management was actively replaced. why was the fate of mr. lewis so different in this instance? >> well i think in this case the merger was undertaken in good faith. it was at that time looked like a reasonable combination. a lot of firms suffered severe losses in the fourth quarter. it was one of the worst quarters i think in history in terms of financial losses. ever judgment at the time was that he could continue to lead the company and we have not addressed that. but obviously we will continue to evaluate management in the board as we go forward and make sure we are comfortable with leadership of bank of america. >> in an e-mail from mr. walsh to yourself on december 30, he
writes and i quote, ken lewis is going to call to reaffirm the understanding that you have. ken may also raise his favorite issue, that is the rich man supervisory team on the same page as the board. richmond staff was on our call today but prior to the call it sounds like they may have threatened a little bit more than ideal on the need to get rid of dividend and fast -- i told price will be making joint determinations. my question is to your knowledge do you think that mr. lewis is interaction with the supervisory team at the richmond fed threatened or coerced in any way mr. lewis? >> welcome the federal reserve in general throughout last year
was concerned about bank of america's capital particularly its tangible common equity. and the federal reserve bank of richmond which was the supervisor of think of america was interested in having bank of america increase their capital perhaps by reducing their dividend through other measures. at various points there were some confusions i think about what the position of the fed was because there were miscommunications between the richmond fed and board of governors and washington and mr. lewis far from being intimidated was free to call and ask me for resolution of these issues and we made sure that everybody that was on the same page and got that cleared up. >> so it would be a normal interaction -- >> yes, and normal process. >> i'm having some concerns with richmond and that kind of thing.
mr. chairman, let me ask, you have gone on the record as supporting increased transparency in connection with federal reserve board operations yet the bailout of bank of america was done behind closed doors without investor public knowledge or input. could the american people really understand in any way what happened? i mean, what really happened? was mr. lewis pleaded to going forward with his own bad deal? or did mr. lewis recklessly agreed to pay too much for merrill lynch so that the federal government felt backed into a corner when faced with the prospect of louis backing out of the merrill deal and of course we experienced the inevitable bankruptcy of merrill
lynch. could you respond to this? >> yes, sir. today i think has been productive in terms of transparency and more information about what happened. clearly there was a very difficult period and many complex problems of the that were being addressed but as i indicated i believe that we solve this problem without an any way taking steps that were either beyond oh-la-la or on ethical. and i believe we did the right thing in order to stabilize both companies or the financial system. >> thank you very much and thank you, mr. chairman. >> the gentleman's time is expired. congresswoman norton for five minutes. >> thank you, mr. chairman and we do appreciate the transparency your try e and to bring to this transaction. i am not inclined to second-guess the judgment of
people in the midst trying to deal with the problem rising, problem after problem in the midst of a unusual crisis that i am interested in bank of america's options under the circumstances. bank of america shareholders. we did have a series of rather unusual late developing facts or factors to come to light in the process of the negotiations for this agreement. i'm wondering if it would not be true that -- let me lay the predicate for this by saying that apparently the legal division apparently had